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The Securities and Exchange Commission (SEC) of the United States launched its most severe penalties regarding initial coin offerings (ICOs) in November 2018 against Paragon (PRG) and Airfox (AIR).

Paragon and Airfox must return all investments and pay a $250,000 fine, which will likely end with bankruptcy.

The SEC references how these two ICOs launched after the SEC warned in July 2017 that ICOs can be considered securities and must register with the SEC and be compliant. The fact is that the SEC has approved zero ICOs according to Chairman Jay Clayton, effectively destroying an entire part of the crypto space.

In July 2017 the SEC made a landmark decision in its case against a decentralized autonomous organization (DAO) operated by Slock.it. It was determined that a cryptocurrency is a security when it is issued by an organization, the investors buy the cryptocurrency from the organization, the investors expect profits, and the profits would be driven by efforts of the organization issuing the cryptocurrency.

In essence, practically every ICO falls under this definition of a security. Not only are cryptocurrencies that launched after this July 2017 decision at risk of SEC enforcement, but also all cryptocurrencies that can be classified as securities, no matter when they launched.

In the ruling against Paragon (PRG) and Airfox (AIR), the SEC said these companies can register as securities. However, this seems similar to the e-gold case, a digital currency that became popular long before Bitcoin existed.

One of the Founders of e-gold, Douglas Jackson, was offered a deal in which he could plead guilty to money laundering and then apply for a license for e-gold so e-gold could keep operating.

Jackson only got a $200 fine and 300 hours of community service, but when he applied for the license, the government turned him down because he was a convicted criminal.

Considering that no other cryptocurrency has received a securities license from the SEC, it seems extremely unlikely that the agency would give one to either Paragon (PRG) or Airfox (AIR), despite requesting registration in their ruling. If the SEC does not give the license, then Paragon (PRG) and Airfox (AIR) would be forced out of business like e-gold.

ICOs are continuing to launch in 2018 despite the SEC not approving any of them. Essentially, new companies are looking for loopholes that would make them exempt from SEC registration. However, the SEC could go after any company that creates a cryptocurrency, if that cryptocurrency is sold to investors and investors expect profits. There’s no real loophole to avoid SEC jurisdiction, although some companies convince themselves they have found a loophole.

When it comes down to it, the SEC clearly does not accept ICOs as legitimate and has not been making any efforts to legitimize ICOs. There already is an expansive legal framework for issuing shares, and perhaps the blockchain and cryptocurrency companies of the future should just issue shares. In fact, there are numerous SEC exemptions for issuing shares. Therefore cryptocurrency companies can raise the funds they need without even registering with the SEC, as long as they do it through shares and not a token.